The Political Economy of Natural Resource-Led Development Anand Rajaram Governance Practice Leader Africa Region, The World Bank February 3, 2013 Cape Town, South Africa February 3, 2013 WB-AusAID Pre-INDABA Mining Conference Anand Rajaram, World Bank, 2013

» Rajaram et.al. Rich Countries, Poor People: The Politics and Governance of Africa’s Natural Wealth WB-AusAID Pre-INDABA Mining Conference Anand Rajaram, World Bank, 2013

Rents from Mining, Oil, and Gas are growing rapidly- and Africa is very much part of the new frontier Source: World Bank Wealth of Nations Database 2012 WB-AusAID Pre-INDABA Mining Conference Anand Rajaram, World Bank, 2013

EI Rents Have Overtaken Aid in Many Resource-Rich Countries (RRCs) Source: Wealth of Nation Database 2012; World Development Indicators. (Data for year 2010) WB-AusAID Pre-INDABA Mining Conference Anand Rajaram, World Bank, 2013

Sub-Saharan Africa Is Still Under-Explored – so this shift is likely to continue Source: USGS 2011, Gelb, Kaiser, and Viñuela Rents per Capita Proven reserves in selected minerals, 2010 WB-AusAID Pre-INDABA Mining Conference Anand Rajaram, World Bank, 2013

Many resource rich countries (RRCs) have done worse than those without natural endowments » Nigeria is a middle income country (PCI $1280) » Has had significant resource inflows since the discovery of oil in 1955 » But … 68% of its population is still below the poverty line (only 36% in 1970) » And it is ranked 156 th/ 187 on the Human Dev. Index » Risk of maternal death is 3.4 (LIC ave. 1.8) » Youth literacy is 72% (LIC ave. 74%) Its infrastructure is not much better than a low income country » Quality of Port infrastructure rated 2.8 (LIC ave. 3.3) » Only 58% has access to safe water (LIC ave. 63%) » Only 50% have access to electricity » Its Institutions of Public Management and Accountability are weaker than most middle income countries Similar statistics for many other RRCs – Angola, DRC, Niger, Ghana, Chad, Cameroon, Sierra Leone So we should be concerned that the resource boom may leave people poor(er), without improved access to education or basic services, without improved skills or employment, and the society at greater risk of conflict in the RRC WB-AusAID Pre-INDABA Mining Conference Anand Rajaram, World Bank, 2013

What differentiates countries that make effective use of resource wealth from those that do not? The quality of institutions is often cited but this depends on … Politics Politics is the elephant in the room.…often not recognized or understood WB-AusAID Pre-INDABA Mining Conference Anand Rajaram, World Bank, 2013

» One way to describe the politics is in terms of the nature of relationships between key EI actors ˃Ex. A government that is politically insecure may be more likely to strike a non- transparent, corrupt deal with shady extractive companies ˃It may represent a narrow elite group and also be less trusted by citizens ˃Civil servants may also seek to extract rents if political leadership is seen to be self-interested ˃The extractive company may then face a hostile public that believes resources are being extracted at their expense ˃Citizens may seek to elect another political party if given the opportunity ˃Vicious cycle of conflict and unstable government may follow ˃We could also identify a positive relationship where a virtuous cycle occurs State (Politicians, CS) Society Developer WB-AusAID Pre-INDABA Mining Conference Anand Rajaram, World Bank, 2013

How the political interactions are manifest in the EI Value Chain adds another dimension Generating Resource Rents Distributing Resource Rents WB-AusAID Pre-INDABA Mining Conference Anand Rajaram, World Bank, 2013

Credibility of commitments Less More LessLess MoreMore #1 Poor revenue generation, and use of revenues to support patronage, not public goods #4 Public goods provided to citizens, credible commitments to developers/citizens #3 Revenue generation is weak, some public good provision but also clientilist private rent distribution # 2 Revenue generation may be adequate but state not inclusive in its programs – limited focus on public goods provision WB-AusAID Pre-INDABA Mining Conference Anand Rajaram, World Bank, 2013

Measuring Credibility of Commitments WB-AusAID Pre-INDABA Mining Conference Anand Rajaram, World Bank, 2013

In political science terms, patrimonial regimes do worse than regimes that practice programmatic pluralism Political inclusiveness Credibility of intertemporal commitment Less credible / weaker enforcementMore credible / stronger enforcement Less inclusive Patrimonial Rule Political instability with high contestation; emphasis on private (elite) goods; exploitation of public resources for private gain  High discount rate  Risk avoidance  Narrow distribution of rents DRC, Niger Hegemonic Government Uncontested autocracy or one-party regime; either predatory or benevolent; emphasis on private (elite) goods with some particularistic and public goods  Low discount rate  Risk taking  Narrow distribution of rents Angola More inclusive Clientelist Pluralism Political competition based on extensive use of clientelism; provision of particularistic goods; low horizontal accountability  High discount rate  Risk avoidance  Broader distribution of rents Nigeria, Ghana Programmatic Pluralism Electoral competition based on programs geared toward collective welfare enhancement; provision of public goods; horizontal and vertical democratic accountability  Low discount rate  Risk taking  Broader distribution of rents Botswana WB-AusAID Pre-INDABA Mining Conference Anand Rajaram, World Bank, 2013

So what can be done to support development in RRCs? We can think about ways to improve incentives and information for better outcomes - Extend time horizons, enhancing intertemporal credibility –Simple, non-discretionary regulatory framework can help to minimize investor uncertainty and ensure policy compacts –Enhancing transparency builds greater credibility and lowers risk Enable collective action, increasing inclusiveness –Empower third-party audit and oversight (international, local levels) to ease information asymmetries across the value chain –Build in checks and balances and foster cooperation across agencies Enclave institutions and capacity, building limited functionality in natural resource management, complemented with contracting-in WB-AusAID Pre-INDABA Mining Conference Anand Rajaram, World Bank, 2013

» Recognize that citizens (current and future generations) are the true owners of the natural resources and must benefit from their extraction » Transparency, accountability and citizen participation are good principles for resource use but should be designed to fit political circumstances » Recognizing the political context through analysis can strengthen domestic and international efforts for incentive-compatible efforts to improve development outcomes WB-AusAID Pre-INDABA Mining Conference Anand Rajaram, World Bank, 2013

Links to Reference Book and Materials WB-AusAID Pre-INDABA Mining Conference Anand Rajaram, World Bank, 2013